Thursday, November 29, 2012

German unemployment dropped by a non-seasonally adjusted 1,900 in November, bringing the number of unemployed down to the lowest level since November last year. Currently, 2.751 million people are without a job. However, today’s improvement is the weakest November improvement since 2004. In seasonally-adjusted terms, unemployment increased slightly, leaving the seasonally-adjusted unemployment rate unchanged at 6.9%.

Supported by the strong labour market, private consumption has become an important driver of German growth. Since the beginning of 2010, private consumption has grown by an average 0.3% QoQ. Of course, this is nothing compared with the shopping frenzy experienced in other countries in the past.

Looking ahead, however, it is doubtful whether private consumption can really take over the baton as main growth driver for the German economy. Employment expectations in the manufacturing sector have entered negative territory, most open vacancies are temporary jobs and several companies have reintroduced short-time work schemes.

German unemployment looks set to increase further. This increase, however, should only be a very mild increase, mainly located in the export industry. Companies operating in domestic sectors, as eg the construction sector and health services, still have a strong demand for labour. The lack of qualified workers and employees continues to be a pressing issue in some sectors, indicating that the labour market could enter a two-speeded period.

Today’s numbers provide further evidence that the labour market is gradually losing steam. However, the lack of qualified employees and still strong labour demand in domestic sectors should make the current slowdown a very gradual one. In fact, if the external environment improves quickly, the slowdown could not only turn out to be gradual but also very short-lived.

Wednesday, November 28, 2012

Monday, November 26, 2012

Eurozone finance ministers finally agreed on measures to grant Greece two additional years for austerity and structural reforms. These measures remain highly conditional and are no guarantee to avoid debt forgiveness in the future.

During last night’s Eurogroup meeting, the Eurogroup gave the principle green light to pay out the next tranche of the bailout programme amounting to 43.7bn euro. At the same time, the Eurogroup agreed on several possible measures to grant Greece two additional years for its austerity measures and structural reforms.

The possible measures are the following: i) a lowering by 100bp of the interest rate charged to Greece on the bilateral loans of the first bailout package; ii) a lowering by 10bp of the guarantee fee costs paid by Greece on the EFSF loans; iii) an extension of the maturities of the bilateral and EFSF loans by 15 years and a deferral of interest payments of Greece on EFSF loans by 10 years; iv) a commitment by Member States to pass on to Greece's escrow account, an amount equivalent to the profit the ECB and national central banks make on their Greek bond holdings under the SMP programme.

To benefit from the above measures, however, Greece will also have to play its role. In fact, the above measures will only be implemented gradually and only under certain conditions to restore debt sustainability. To ensure Greek debt sustainability without debt forgiveness, the Eurozone agreed on a series of measures. The escrow account has become more important as not only all privatization revenues have to be transferred to this account but also the “targeted primary surplus as well as 30% of the excess primary surplus”. Moreover, a debt-buy-back could also be part of restoring debt sustainability. However, this programme is anything but certain as the rather vague official formulation of “the Eurogroup was informed that Greece is considering certain debt reduction measures in the near future, which may involve public debt tender purchases of the various categories of sovereign obligations. If this is the route chosen, any tender or exchange prices are expected to be no higher than those at the close on Friday, 23 November 2012.”

Taking all these measures together, the Eurogroup provided the expected fudge to keep Greece in the Eurozone. It is obvious that even the Eurogroup does not expect that this was the last word on Greece. Even if debt forgiveness was not mentioned, the sentence that Eurozone countries will consider further measures to ensure that Greek debt can reach 124% of GDP in 2020 and a level “ substantially lower than 110% in 2022” is rather telling.

At first glance, the political will to give Greece two additional years for austerity and reforms has finally been substantiated. However, as so often in the past, there are still some elements in the Eurogroup’s decision that look clear and good at the end of a long Brussels’ night but which could lose their congeniality after sunrise. Here are just a couple of them: the Eurogroup’s commitments remain highly conditional, some national parliaments (like the German Bundestag) still need to agree to the measures and the debt-buy-back scheme looks anything but certain. Chances are high that this month’s meetings were not the last night-breaking discussions on Greece.

After three meetings this months and a total of more than 24 hours of discussing and negotiating, the Eurozone countries have put their money where their mouth is. The political will to reward the Greek austerity and reform measures has already been there for a while. Now, this political will has finally been supplemented by financial support. However, it is clearly not a carte blanche for Greece but rather a very tight leash.

Friday, November 23, 2012

Today’s GDP and Ifo readings have given some food for thought on the growth prospects of the German economy.

The second estimate of the statistical office confirmed that the German economy defied the euro crisis once again in the third quarter. GDP growth in the Eurozone’s biggest economy came in at 0.2% QoQ, from 0.3% in 2Q. Growth was driven by net exports, with exports up by 1.4% QoQ, government (0.4% QoQ) and private consumption (0.3%). Investments were down by 1.7% QoQ. Inventory reductions, however, illustrated further signs of crisis vulnerability.

Unfortunately, it looks as if these positive GDP data could soon be nothing more than the memories of the good old days. Signs of a further cooling of the German economy are increasing. Order books have become alarmingly thin, industrial production is dropping and German businesses have become downbeat. Earlier this week, a survey among businesses showed that for the first time since 2009, there was a majority of pessimists regarding the outlook for 2013. Uncertainty about the Eurozone was the most important factor hampering investment decisions.

However, any short-term cooling could turn out to be rather short-lived, as indicated by today’s Ifo data. The Ifo index surprised with an increase to 101.4, from 100.0 in October. This was the first increase since March 2012. The increase was driven by both the current assessment component (108.1, from 107.3) and expectations (95.2, from 93.2).

The increase came as a clear surprise but maybe only reflects typical German sobriety. Even if domestic demand should lose some steam due to a weaker labour market, the risk for the economy of falling off the cliff looks very limited. To the contrary, the creeping decoupling from the rest of the Eurozone – only 1/3 of German exports currently go to Eurozone peers – enables the economy to benefit quickly from any rebound of the global economy. In this regards, latest signs of improvement from the US and China were good news for German companies.

Solid fundamentals should spare the economy from the recessionary mix of structural reforms and austerity measures. The German economy might have lost its invulnerability but today’s numbers indicate that the economy should not join the race to the bottom most other Eurozone countries are currently in.

Wednesday, November 21, 2012

Eurozone finance ministers have a strong affinity for cliff-hangers. Last night’s almost twelve-hour meeting did not bring any conclusion on how to finance more time for Greece. The decision was postponed until next week Monday.

The only thing that is clear after last night’s Eurozone finance minister meeting is that nothing is clear. The Eurogroup postponed the decision on how to finance more time for the Greek adjustment to next week Monday. The phrase in the official statement that “the Eurogroup has had an extensive discussion and made progress in identifying a consistent package of credible initiatives aimed at making a further substantial contribution to the sustainability of Greek government debt” shows that disagreement remains deep.

For once, Greece had apparently no responsibility for the further delay. Indeed, the final statement praises Greece for having met all prior actions required ahead of the meeting, citing structural reforms, the budget for 2013 and the 2013-2016 medium term fiscal strategy. Data released yesterday by the Greek Ministry of Finance confirmed that progresses in the implementation of the adjustment are indeed being made, with the state sector budget execution ahead of schedule at end of October.

At the Eurogroup level, the two issues at stake still are: i) the financing of the Greek funding gap, resulting from two additional years to adjust, and ii) how to restore long-term debt sustainability. Finding the money for two additional years (up to 32bn euro) is probably the easier task than restoring debt sustainability. According to latest reports, Greek debt will rather be above 140% of GDP in 2020 than close to the official target of 120%. In euro, this gap in 2010 will probably amount to 70bn to 100bn. Finding such an amount requires lots of financial creativity as long as Eurozone countries do not want to embark on clean-cut solutions like debt forgiveness or a third package. The current deadlock seems to result from strongly diverging views between the IMF and the Eurozone on how to restore debt sustainability. While the IMF favours a clear-cut solution, most Eurozone countries seem to support a the fudge option, interpreting debt sustainability in a more flexible manner than the IMF.

Last night’s meeting has again shown that that the Greek case pushes the limits of Eurozone finance ministers’ financial creativity. Or to put it more positively: maybe ministers just follow the principle of haste makes waste.

Wednesday, November 14, 2012

The crisis-denier. According to a first estimate of the statistical office, the German economy once again defied all swan songs. Eurozone's biggest economy grew by 0.2% QoQ in the third quarter, from 0.3% in 2Q 2012. On the year, German GDP was up by 0.9%. Combined with stronger-than-expected French GDP growth (+0.2% QoQ in 3Q), chances have increased that Eurozone GDP growth (released at 11am CET) could be better than our forecast of -0.3% QoQ.

The decomposition of German growth will only be released at the end of the next week but according to the press statement of the German statistical office and available monthly data, consumption and net exports were the main growth drivers. The sharp drop of all confidence indicators since late-Spring has not yet been translated into a contraction of the economy. In fact, the real economy proves to be more resilient than expected. The strong labour market, wage increases but above all the good old friend exports are the main drivers of sustained resilience.

Looking ahead, however, at least the near term outlook for the German economy looks anything but rosy. It is hard to believe that the current decoupling of soft and hard data can last much longer. To be more precise, rapidly thinned out order books do not bode well for industrial production in the coming months. The negative industrial production reading in September gave already a bitter foretaste of worse things to come.

Looking beyond the near term, however, shows a somewhat more positive picture. Also in 2013, the German economy should once again be spared from the recessionary mix of structural reforms and austerity measures. Moreover, even if domestic demand should lose some steam due to a weaker labour market, the risk for the economy of falling off the cliff looks very limited. To the contrary, the creeping decoupling from the rest of the Eurozone – only 1/3 of German exports currently go to Eurozone peers – enables the economy to benefit quickly from any rebound of the global economy.

Today’s numbers have some similarities with Germany’s national soccer team. Even if the performance forbids any enthusiasm, it is still sufficient to keep the rest of the Eurozone in check…

Monday, November 12, 2012

Last
night’s Eurogroup meeting paved the way for Greece to stay in the
Eurozone. Ministers decided on two additional adjustment years for
Greece. Finding the
money to fund these extra years, however, was postponed.

Last night’s Eurozone finance minister
meeting was finally a meeting that ended before mid-night. European
experience, however, also shows that shorter meetings are normally a
sign of significant disagreement and that crucial
decisions have simply been postponed. Yesterday’s meeting adds evidence
to this experience.

As expected, ministers agreed that
Greece could have two more years to meet its fiscal target, shifting the
goal of having a primary budget surplus from 2014 to 2016. These two
years are a kind of reward for the Greek government.
Notably, the official Eurogroup statement is full of praise for the
undertaken efforts by the Greek government. Interestingly, the statement
also refers to the efforts taken by citizens, a gesture of
acknowledgement of the social impact of austerity measures
and structural reforms.

Of course, more time also means more
money. Two additional years lead to an immediate funding gap of around
30bn euro which needs to be filled but also put the debt sustainability
target of a debt ratio of 120% of GDP by 2020
at risk.

As regards the funding gap, no decision
was taken last night. Eurogroup president Juncker announced that this
issue should be discussed at another meeting on 20 November and at the
latest on 28 November. These dates will give
governments the chance to get the green light from national parliaments
for changes to the Greek programme. As regards debt sustainability,
media reports mentioned a debt ratio of 140% of GDP in 2020 in the new
troika report.

The race on how to finance the new 30bn
euro and how to restore debt sustainability is still open. Option range
from a clean-cut third bailout package for Greece to debt forgiveness.
In our view, probably none of these two options
will eventually be chosen. The most likely outcome of the next two
weeks should be a typical Eurozone fudge: lower interest rates on the
current Greek loans and an extension of the loans. Imagination or
creativity has no limits. Yesterday, Juncker offered
another fudge, saying that the date of bringing the debt ratio down to
120% of GDP could simply be delayed by two years. But let’s be clear,
even such a Eurozone fudge would be a covert Official Sector Involvement
as rescheduling of debt obviously also has
its costs.

Yesterday’s meeting was another small
step in the Eurozone saga. The political will to keep Greece in the
Eurozone had already emerged over the summer. Now, it looks as if all
other elements have to fit into this political will.
We remain confidence that the next tranche will be paid and that the
Eurozone will also find an agreement on how to bridge the new funding
gap in the next two weeks. Needless to say that the final decision on
the next Greek tranche, a new financing gap and
debt sustainability will not be the end of the matter.

Thursday, November 8, 2012

As expected, the ECB kept its powder dry at today’s
meeting. Rates on hold and no other measures to support the Eurozone
economy. Instead, lots of backslapping for the new crown jewel, the OMT
program.

The ECB’s macro-economic assessment remained virtually unchanged. The
ECB does not close its eyes to the Eurozone reality, expecting no
improvement of economic activity towards the end of the year. It looks
as if next month’s ECB staff projections will join the crowd of downward
revisions for 2013 growth. As regards inflation, the ECB still expects
headline inflation to drop below 2% in the course of next year. The
closely monitored balance of risks remained unchanged. According to
Draghi, risks to the economic outlook remain on the downside. Risks to
the outlook for price developments remain broadly unchanged.

Ahead of today’s ECB meeting, there had been some new speculation about a
possible rate cut when Mario Draghi yesterday said at a speech that the
“risks of inflation are currently very low over the medium term”. Some
market participants had interpreted this as a dovish signal, even
worthwhile breaking the so-called Purdah period ahead of ECB meetings.
Today’s press conference shows that the speculations were premature. The
ECB’s bias remains unchanged. Of course, there still is a bias towards
easing but it is not an imminent rate cutting bias.

In fact, Draghi’s countless repetitions of the importance of the OMT
program indicates that the ECB currently does not consider rate cuts as
an effective tool to tackle the recession. Draghi confirmed that the ECB
stood ready to activate the program. However, activation required a
country to ask for an ESM program. There was no OMT without a program.

The OMT remains the crown jewel in the ECB’s anti-crisis toolbox.
However, as Draghi rightly said, with the OMT, the ECB has put in place a
fully effective backstop for the Eurozone. A backstop against the tail
risk of a Eurozone break-up. In our view, however, the OMT is not the
magic bullet that can also restore growth. Even with structural reforms,
austerity measures and an active OMT, chances are high that the ECB
will need to come up with additional measures to support the Eurozone
economy. A rate cut, even if it will not come next month, could be part
of the measures.

All in all, today’s meeting was almost a non-event. The information
content was close to zero. If the ECB ever starts a reassessment of its
transparency policy, today’s meeting provides an argument to shorten the
press conferences.

It seems as if German chancellor Merkel wants to
capitalise the current lack of a Eurozone thought leadership, trying to
actively steer the integration debate.

At Yesterday, German chancellor Merkel spoke before the European
Parliament, calling for far-reaching reforms of the monetary union. What
she said was not new but it was another advance, trying to steer the
European debate. According to Merkel, the Eurozone 2.0 required more
common policies in the fields of financial sector regulation, fiscal and
economic policies. The monetary union needs more coordination, not only
of fiscal policies but also of other policies. Merkel mentioned a
further harmonization of labour market and tax policies as further areas
of closer coordination. To reach this goal, the Merkel again proposed a
king of two-pillar strategy of stick-and-carrot. The stick would be a
further loss of national sovereignty with far-reaching powers and
authorities for the European Commission. Merkel even mentioned the
possibility that the European Commission could directly intervene in
national budgets. The carrot could be the so-called fiscal capacity, a
Eurozone fund, which should reward successful structural reforms. The
ultimate carrot of real financial burden sharing like for example
Eurobonds, however, was not (yet) part of the official German strategy.

While the rest of the Eurozone’s government leaders have their hands
full with enormous domestic tasks and challenges, the German government
is slowly but surely filling the power vacuum as opinion leader in the
euro crisis. Obviously, it would still take a couple for years before
the German ideas and proposals could eventually be implemented. However,
it looks as they are seriously trying to push the Eurozone into the
German direction. Given the current (im-)balance of political forces in
the Eurozone, Merkel’s chances of success look currently better than
ever before.

The slowdown continues. German industrial production dropped by 1.8% MoM in September, from -0.4% in August, providing further evidence that the economy’s backbone is quickly losing steam. In annual growth terms, industrial production is down by 1.2%. The drop was mainly driven by all manufacturing sectors. Only the construction sector recovered from its August decline, increasing by 2.7% MoM. Interestingly, despite today’s drop, industrial production was still stronger in 3Q than in 2Q.

The German decoupling from the rest of the Eurozone has come to an end. Strong trading ties with non-Eurozone countries had shielded the economy against the euro crisis. Now, with the global economic cooling in the second half of the year, this immunity is quickly fading away.

Looking ahead, latest indicators do not give much hope that the current downward trend will reverse any time soon. Business sentiment has been on a Yesterday’s new order data was again a disappointment. In September, new orders from non-Eurozone countries dropped by almost 6%, while new orders from Eurozone peers even plunged by more than 11% MoM. At the same time, companies have started to increase inventories. The increasing discrepancy between built-up inventories and emptying order books does not bode well for the near-term outlook for the German industry. However, if the recent positive cyclical trends from the US and Chinese economies prove to be sustainable, the German industrial slowdown could be rather short-lived with a rebound in the first half of 2013.

Today’s industrial production data send a two-fold message: on the one hand, it confirms our view that the German economy could have avoided a contraction in the third quarter. However, on the other hand, it also confirms our view of gradual stagnation. In short, the German economy is stuttering but not (yet) plunging.